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Vogel: Coming Financial Scandal

Twenty years ago, the Neighborhood Development Corporation of Jamaica Plain built forty affordable homes in Boston. While under construction, more than 1000 people asked for applications. Because we were selling these homes as limited equity cooperatives, NDC held a number of meetings in the neighborhood to educate potential applicants about how limited equity cooperatives work and what would be expected of owners. What surprised everyone was that requiring people to attend a one hour meeting resulted in more than half the families dropping out.

Banks and insurance companies understand this concept. If you create an extra step in the process, people drop out. As Bank of America manager William E. Wilson Jr., wrote in his affidavit concerning the banks tactics when it came to loan modifications, homeowners were often required to send in documentation “multiple times”. He goes on, “Bank of America claimed that documents were incomplete or missing when they were not... People who had done everything that Bank of America had asked of them lost their homes to foreclosure.”

For this kind of misbehavior a number of banks have now paid billions of dollars in fines. Their reputations have been sullied and they face stricter regulation. One might hope that insurance companies will have learned from the banks’ experience but my own experience makes me doubtful.

Like a lot of baby boomers, I’m nearing retirement, so I’ve started trying to track down my retirement benefits from various employers. My experience has not been pleasant. In one case, I contacted a major insurance company that held my defined benefit plan. After a couple of phone calls they found that they did, in fact, have an account with my name on it and a record of my employment. However, when the account was set up they failed to include my social security number. Instead they put in a made up social security number “as a place holder”.

To access my account, I needed to input my social security number which, of course, did not match the one on file. What followed was a process that took several months and included numerous phone calls and several letters. Apparently this process was designed before the advent of the internet, and the company saw no reason to change it. Their theory seemed to be that if they delayed long enough, I would give up or die and then they wouldn’t have to pay me.

As other baby boomers near retirement, I hope that instead of imitating the banks, insurance companies will try to behave more like Amazon and establish customer friendly systems. But I think that’s fairly unlikely – which is why I can predict with near certainty that in the years ahead insurance companies and others managing retirement accounts will find themselves at the center of a major scandal.

John Vogel is a retired professor from the Tuck School of Business. His tenure at Dartmouth began in 1992, where he taught Real Estate and Entrepreneurship in the Social Sector, among other subjects. He was named by the “Business Week Guide” to Business Schools as one of Tuck’s “Outstanding Faculty” members.
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